Diesel prices ended four days of trading in which they finished much higher than they were at the start of the business week and rose faster than crude and gasoline prices.
This is a worrying trend for consumers as it signals that once again diesel is moving at a more bullish pace than the oil market as a whole. That it has already done so in recent months is evident in the gasoline-diesel gap seen on price signs outside retail outlets, and it has a complex set of causes.
Ultra-low sulfur diesel for July delivery settled on the CME commodity exchange on Friday at $4.2803 a gallon. That marked a gain of 7.19 cents per gallon on the day for a 1.71% increase. It traded as high as $4.3250.
For the week — which was just four trading days, taking into account the Memorial Day holiday — the July ULSD rose 9.6%, posting a gain of 37.5 cents per gallon.
In contrast, WTI’s gain over the four days (from May 27 settlement to settlement at the end of this week) was 3.3% for West Texas Intermediate crude, virtually no overall movement for global benchmark crude. Brent, and 8.6% for RBOB, an unfinished gasoline blendstock that is a commercial gasoline proxy.
These kinds of numbers suggest that increasingly the problem in the market is not just the loss of Russian crude supply, but a loss of refining capacity worldwide coming home, compounded by the effective loss of part of the Russian refining capacity and its production as a result of formal and informal sanctions.
This is most evident in one of the most basic numbers traders watch: the 3:2:1. This is a rough estimate of refining margins, obtained by taking the price of Brent or WTI and multiplying it by 3, then subtracting that number from the sum of two barrels of gasoline and one barrel of ULSD.
The 3:2:1 for Brent and WTI spent most of the week in the range of $55 to $60 per barrel, depending on how it was calculated. (Even a simple number like this can be at the center of differences in methodology.) At the start of 2021, it was closer to $20 a barrel, a figure far more in line with historical norms. A 3:2:1 in the upper $50 leaves traders searching for new words to describe how unprecedented it is.
This kind of explosion can be expected in a world where the International Energy Agency estimated earlier this year that global refining capacity saw a net drop of 730,000 barrels per day in 2021. that this represents less than 1% of the world oil market, in a tight supply/demand balance, the impact of such a drop can be enormous.
A $55, 3:2:1 will incentivize refiners to process as much as they can. And that’s evident in the Energy Information Administration’s weekly data on U.S. refining operations — primarily.
U.S. refineries operated at 92.6% capacity in the week ended May 27. While this is a healthy number, it was actually down slightly from 93.6% the previous week. And that’s not much higher than the average for the last full week of May, which is 91.8% over the past five years of data points, excluding pandemic-hit 2020.
But the national ULSD production numbers are disappointing. Total production for the past two weeks through May 27 was 4.875 and 4.818 million barrels per day, respectively. These are the highest in a year, but the bad news for diesel consumers is that this is still below production in the last week of May for the three years before the pandemic. Even at huge margins, U.S. refiners are making less diesel than they did at this time of year between 2017 and 2019.
On the US East Coast, refiners rushed to take advantage of the region’s strong margins. Refiners there over the past two weeks have been operating at 97% and 98.2%, respectively, in an industry in which it is virtually impossible to operate at 100% for an extended period. Something inevitably breaks down. But East Coast operating rates are against a refining capacity base that has lost several hundred thousand barrels per day in recent years.
The East Coast has generated particular interest in the diesel market given its growing value relative to the Gulf Coast, which is the main refining center and a key export point for the United States and the world.
Weekly inventory figures fell again for the week ended May 27. They were 18.8 million barrels, compared to 20.4 million barrels just two weeks ago. And when it was at 20.4 million, it was already well below the roughly 38 million barrels at the start of the year in the East Coast area known as PADD 1, an area designated by the EIA.
Despite these tight inventories, the spot market spread between the East Coast price and the Gulf Coast price reacted counter-intuitively.
For much of May, as East Coast diesel inventories steadily declined throughout the year, that gap reached as much as 70 cents per gallon, according to data provided to FreightWaves by the Gateway. General Index reference.
But on Friday, General Index estimated the gap at 7 cts/g, after declining steadily throughout the week. It closed last week at 11.5 cents, rose to 10.8 cents on Monday and Tuesday, then fell to 5 cents on Thursday before the slight widening on Friday.
This odd move may be a signal that the compression seen in the East is no longer the outlier and tight inventories across the country means the East Coast has just arrived first. For example, the spread between the Gulf Coast and Chicago ULSD markets stood at around 20 cents on Thursday, with Chicago running such a premium to the Gulf Coast. This spread also tends to be a few cents during normal times, much like the spread between the East Coast and the Gulf Coast.
“Normal” seems a long way off.
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